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WEEKLY ISSUE: The Impact of Tariffs and Continued Rundown of Select Positions

WEEKLY ISSUE: The Impact of Tariffs and Continued Rundown of Select Positions

 

Our Latest Thoughts on Trump Tariffs

The stock market roller coaster of the last few weeks is clearly continuing. This week we have President Trump’s potential steel and aluminum tariffs take center stage, shifting the attention away from Fed Chief Jerome Powell last week. When I shared with you my view the market would trade data point to data point until the end of the Fed’s Mar. 20-21 monetary policy meeting, I certainly didn’t expect let alone anticipate these tariffs and their escalating conversation to be a part of it. In a post earlier this week, I shared my view that Trump is once again utilizing the negotiating strategy he laid out in his book, Art of the Deal. In another one today, I gamed out what is likely to happen should Trump go forward with the tariffs.

Last night’s resignation of Trump economic advisor Gary Cohn has certainly fanned the flames of uncertainty over the tariffs, with more people thinking that Trump is “serious.” In an effort to counterbalance that resignation, this morning Commerce Secretary Wilbur Ross shared that Trump “has indicated a degree of flexibility on tariffs for Canada and Mexico.” That Cohn-related walk-back by Secretary Ross, combined with comments made yesterday by Treasury Secretary Steven Mnuchin that indicated that “once a new NAFTA deal is reached, the trading partners wouldn’t be subject to the tariffs” confirms my view that Trump remains on the Art of the Deal negotiation path.

In my post earlier this morning about the tariffs, I shared that we will likely see choppy waters as this issue comes to a resolution and leads up to the Fed’s next monetary policy meeting conclusion on March 21. Expect volatility to remain in place and the coming economic data will either amplify or quell its magnitude. Barring any breaking news, I’ll be on The Intelligence Report with Trish Regan on FOX Business to discuss all of this at 2 PM ET today.

While many fret over the market swings, my perspective is that the domestic economy remains on firm footing and barring a trade war volatility will allow us to pick up thematically well-positioned companies at better prices. A great example of this was had earlier this week with the February heavy truck orders that served to confirm my thesis behind Paccar (PCAR) shares.

When Costco Wholesale (COST) reports its quarterly results after the market close, we should see similar confirmation in the form of not only wallet share gains via its top line results, but also in rising membership fees as more consumers look to stretch the disposable income they do have, a key component of our Cash-Strapped Consumers investment theme.

To set the stage for Costco’s report tonight, consensus expectations for the quarter sit at EPS of $1.46 on revenue of $32.7 billion, up from $1.17 and $29.8 billion in the year-ago quarter. As a reminder, one of the key differentiators for Costco is the high margin membership fees that are poised to grow as the company continues to open new warehouses. This means, at least for me, that roadmap, will be one of the areas of focus on the company’s post-earnings conference call. I’ll also be listening to see the impact of tax reform on the company’s outlook for 2018.

  • Our price target on Paccar (PCAR) shares remains $85.
  • Our price target on Costco Wholesale (COST) shares remains $200.

 

 

Getting back to the Tematica Investing Select List

In last week’s issue, I began sharing some much-needed updates across the Select List, and I’m back at it again this week with a few more. Over the next few weeks, I’ll look to round out the list before we break at the end of March and get ready to gear up for 1Q 2108 earnings season.

Yes… I know… before too long it will once again be time for that zaniness.

All the more important to share these updates with you so we set the table for the earnings meal to be had.

 

Amazon (AMZN),  Connected Society

Simply put, Amazon shares have been a champ so far in 2018 rising more than 30%, which brings the return on the Select List to more than 100% since being added back in 2016. I’ve said these shares are ones to own, not trade given the accelerating shift to digital commerce, and growing adoption of the high margin, secret sauce that is Amazon Web Services as more businesses turn to the cloud. As filled with creative destruction as those two businesses are, it looks like Amazon is poised to offer further disruption in the healthcare and financial services business given conversations with JPMorgan (JPM), Berkshire Hathaway (BRK.A), Capital One (COF) and others.

I’ve raised our price target several times on AMZN shares, and it increasingly looks like that will have to happen again and then some depending on how soon these new layers of disruption materialize.

  • Our price target on Amazon (AMZN) shares remains $1,750.

 

Starbucks (SBUX), Guilty Pleasure

Year to date, Starbucks shares are essentially unchanged compared to where they were trading as we exited 2017. And the same is true if we look at the shares over the last year – they are up modestly. What we are dealing with here is a company that is once again in transition as it looks to invigorate its domestic business while growing its presence in still underserved markets outside the US like China and Italy. One of the central strategies in both areas is to leverage its high-end Reserve Roastery concept, which keeps the company very much in tune with our Guilty Pleasure investing theme.

Historically speaking, Starbucks has been a company that has been able to successfully pivot its business when it has stumbled, and in our view, that merits some patience with the shares. Helping fuel that patience is the knowledge that Starbucks intends to return $15 billion to shareholders over the next three years in the form of dividends and buybacks.

  • Our price target on Starbucks (SBUX) shares remains $68

 

Disney (DIS), Content is King

Disney shares have traded off some 3% thus far in 2018, which is not unsurprising given we are in the seasonally weakest part of the year for the company. That said, the latest Marvel film, The Black Panther, is crushing it at the box office and ups the ante for the next Avengers film that will hit theaters in a few months. Disney continues to leverage these and other characters as it revamps its theme parks and hotels, which should drive attendance despite yet another round of price increases.

The big “wait and see” for Disney over the coming months will be its move into its own streaming services for both ESPN and eventually a Disney content-centric service. While I see this as Disney making the right moves to address the chord cutting headwind that is part of our Connected Society investing theme, to paraphrase the great film Bull Durham, just because Disney builds it doesn’t mean people will stream it. In a positive move, Disney installed James Pitaro as the new president of ESPN. Mr. Pitaro’s background as chairman of Disney Consumer Products and Interactive Media, as well as the head of Yahoo! Media, sends investors the signal that getting the streaming services in place will be a top priority going forward for ESPN.

The next catalyst to be had for Disney will be spring break and then the summer movie season. Between now and then, I expect Disney will continue to put its massive buyback program to work.

  • Our price target on Disney (DIS) shares remains $125

 

United Parcel Service, Connected Society

Our UPS shares were hard hit earlier in the year given renewed concerns that Amazon would expand its own logistics offering. At the time, my view was this was an overblown concern, and it still is. This week, we saw Stifel Nicolaus warm up to the shares, upping them to a Buy rating with a $121 price target given what it sees as a “strong underlying package and freight businesses.”

Each month in the Retail Sales report we see the share gains had at non-store retailers, and we know companies ranging from Costco and Walmart (WMT) to Nike (NKE) and many others are embracing the Direct to Consumer (D2C) business model. All of this bodes well for UPS shares over the coming year.

The one potential hiccup to watch will be negotiations with the Teamsters Union this summer. If that brings the shares near or below our Select List entry point, I’ll look to scale into this position ahead of the seasonally strong second half of the year.

  • Our price target on United Parcel Service (UPS) shares remains $130.

 

 

WEEKLY ISSUE: The Shakeout from Market Volatility on the Select List

WEEKLY ISSUE: The Shakeout from Market Volatility on the Select List

 

 

It’s Wednesday, February 7, and the stock market is coming off one of its wild rides it has seen in the last few days. I shared my thoughts on the what’s and why’s behind that yesterday with subscribers as well as with Charles Payne, the host of Making Money with Charles Payne on Fox Business – if you missed that, you can watch it here.

As investors digest the realization the Fed could boost interest rates more than it has telegraphed – something very different than we’ve experienced in the last several years – the domestic stock market appears to be finding its footing as gains over the last few days are being recouped. Lending a helping hand is the corporate bond market, which, in contrast to the turbulent moves of late in the domestic stock market, signals that credit investors remain comfortable with corporate credit fundamentals, the outlook for earnings and the ability for companies to absorb higher interest rates.

My perspective is this expectation reset for domestic stocks follows a rapid ascent over the last few months, and it’s removed some of the froth from the market as valuations levels have drifted back to earth from the rare air they recently inhabited.

 

Among Opportunity This New Market Dynamic Brings, There Have Been Casualties

While this offers some new opportunities for both new positions on the Tematica Investing Select List as well as the opportunity to scale into some positions at better prices once the sharp swings in stocks have abated some, it also means there have been some casualties.

We were stopped out of our shares in Cashless Consumption investment theme company, USA Technologies (USAT) when our $7.50 stop loss was triggered yesterday. While the shares snapped back along with the market rally yesterday, we were none the less stopped out, with the overall position returning more than 65% since we added them to the Select List last April. For those keeping track, that compares to the 15.3% return in the S&P 500 at the same time so, yeah, we’re not exactly broken up over things. We will put USAT shares on the Tematica Contender List and look to revisit them after the company reports earnings tomorrow (Thursday, Feb. 8).

That’s the second Select List position to have been stopped out in the last several days. The other was AXT Inc. (AXTI) last week, and as a reminder that position returned almost 27% vs. a 15% move in the S&P 500. Again, not too shabby!

The last week has brought a meaningful dip in shares of Costco Wholesale (COST). On recent episodes of our Cocktail Investing Podcast, Tematica Chief Macro Strategist Lenore Hawkins and I have discussed the lack of pronounced wage gains for nonsupervisory workers (82% of the US workforce) paired with rising credit card and other debt. That combination likely means we haven’t seen the last of the Cash-Strapped Consumer investment theme — of the key thematic tailwinds we see behind Costco’s business. While COST shares are still up more than 15% since being added to the Select List, we see the recent 5% drop in the shares as an opportunity for those who remained on the sidelines before the company reports its quarterly earnings in early March.

  • Our price target on Costco Wholesale (COST) shares remains $200.

 

 

Remaining Patient on AMAT, OLED and AAPL

Two other names on the Tematica Investing Select List have fallen hard of late, in part due to the market’s gyrations, but also over lingering Apple (AAPL) and other smartphone-related concerns. We are referring to Disruptive Technologies investment theme companies Applied Materials (AMAT) and Universal Display (OLED). As we shared last week, it increasingly looks that Apple’s smartphone volumes, especially for the higher priced, higher margin iPhone X won’t be cut as hard as had been rumored. Moreover, current chatter suggests Apple will once again introduce three new iPhone models this year, two of which are slated to utilize organic light emitting diode displays.

Odds are iPhone projections will take time to move from chatter to belief to fact. In the meantime, we are seeing other smartphone vendors adopt organic light emitting diode displays, and as we saw at CES 201 TV adoption is going into full swing this year. That ramping demand also bodes for Applied Materials (AMAT), which is also benefitting from capital spending plans in China and elsewhere as chip manufacturers contend with rising demand across a growing array of connected devices and data centers.

  • Our price target on Apple (AAPL) remains $200
  • Our price target on Universal Display (OLED) remains $225
  • Our price target on Applied Materials (AMAT) remains $70

 

The 5G Network Buildout is Gaining Momentum – Good News for NOK and DY

This past week beleaguered mobile carrier, Sprint (S), threw its hat into the 5G network ring announcing that it will join AT&T (T), Verizon (VZ), and T-Mobile USA (TMUS) in launching a commercial 5G network in 2019. That was news was a solid boost to our Nokia (NOK) shares, which rose 15% last week. The company remains poised to see a pick-up in infrastructure demand as well as IP licensing for 5G technology, and I’ll continue to watch network launch details as well as commentary from Contender List resident Dycom Industries (DY), whose business focuses on the actual construction of such networks.

Several months ago, I shared that we tend to see a pack mentality with the mobile carriers and new technologies – once one makes a move, the others tend to follow rather than risk a customer base that thinks they are behind the curve. In today’s increasingly Connected Society that chews increasingly on data and streaming services, that thought can be a deathblow to a company’s customer count.

  • Our price target on Nokia (NOK) shares remains $8.50
  • I continue to evaluate upgrading Dycom (DY) shares to the Select List, but I am inclined to wait until we pass the winter season given the impact of weather on the company’s construction business.

 

Disney Offers Some Hope for Its ESPN Unit

Last night Disney (DIS) announced its December quarter results while the overall tone was positive, the stand out item to me was the announcement of the new ESPN streaming service being introduced in the next few months that has a price tag of $4.99 a month. For that, ESPN+ customers will get “thousands” of live events, including pro baseball, hockey and soccer, as well as tennis, boxing, golf and college sports not available on ESPN’s traditional TV networks. Alongside the service, Disney will unveil a new, streamlined version of the ESPN app, which is slated to include greater levels of customization.

In my view, all of this lays the groundwork for Disney’s eventual launch of its own Disney streaming content service in 2019, but it also looks to change the conversation around ESPN proper, a business that continues to lose subscribers. Not surprising, given that Comcast (CMCA) continues to report cable TV subscriber defections. One of the key components to watch will be the shake-out of the rights to stream live games from the major professional leagues — the NFL, Major League Baseball, the NBA. Currently, ESPN is on the hook for about $4 billion a year in rights fees to those three leagues alone — not to mention the rights fees committed to college athletics. Those deals, however, include only the rights to broadcast those games on cable networks or on the ESPN app to customers that can prove they have a cable subscription, not cord-cutters. So the question will be how quick will customers jump on board to pay $5 a month for lower-level games, or will they be able to cut deals with the major professional sports leagues to include some of their games as well.

Nevertheless, I continue to see all of these developments as Disney moving its content business in step with our Connected Society investing theme, which should be an additive element to the Content is King investment theme tailwind Disney continues to ride. With that in mind, we are seeing rave reviews for the next Marvel movie – The Black Panther – that will be released on Feb. 16. The company’s more robust 2018 movie slate kicks off in earnest a few months later.

  • We will continue to be patient investors with Disney, and our price target on the shares remains $125

 

 

 

Remaining Opportunistic as the Market Gets Cautious

Remaining Opportunistic as the Market Gets Cautious

After taking the prior week off on my sojourn to Singapore to present at INVESTFair 2017, I’m back. Take it from me, not only was the food fantastic as I put on several extra pounds, but Singapore is far ahead of us when it comes to our Cashless Consumption investing theme. Tematica’s Chief Macro Strategist, Lenore Hawkins, and I talked about this on our Cocktail Investing podcast recently, but that level of activity keeps us bullish on USA Technology (USAT) shares on the Tematica Select List.

Earlier this week, we posted comments on Content is King player Disney (DIS)’s recent announcement it will look to shun Netflix (NFLX) and enter the streaming content market gun, rather than remaining a content bullet, and scaled further into shares of Food with Integrity company Amplify Snacks (BETR). We also sent over out latest high-level thoughts on the market in this week’s Monday Morning Kickoff – if you missed it, you can read it here.

As a quick recap since our last Tematica Investing, we’ve seen a far more cautious attitude enter the market following the back and forth with the U.S. and North Korea. At the same time, we’re also seeing some fatigue as even solid earnings beats like the one yesterday from Home Depot (HD) are not having the usual or expected stock price reaction. While we could toss it up to the fact that we’re entering the back half of August — one of the traditionally slower times of the year as people sneak it that last round of summer vacation — there could be something else going on.

Our view here at Tematica is investors are taking stock of not only the vector and velocity of the domestic economy, but also the growing political unease and are looking ahead to what’s coming down the barrel in September: the unveiling of President Trump’s tax reform, Congress dealing with the debt ceiling and potentially the start of the Fed’s balance sheet unwinding. All that during what has historically been one of the worst months for the domestic stock market. We’d add in that September is full of investor conferences, and after the usual August quiet, we suspect investors will be listening closely to these upcoming company presentations to fine tune back-half of the year expectations.

So, while we’ve seen a bit of a rebound in the market so far this week following last week’s sell off, we’re inclined to see the near-term waters remaining a tad choppy. Let’s remember, trading volumes tend to be a tad light this time of year and that can exacerbate the swings in stock prices. The net result is that we will tread carefully in the coming weeks, but we will still be opportunistic like we were with the buying of additional Amplify Snacks (BETR) shares yesterday, a move that reduced the overall cost basis on the Tematica Select List.

 

Checking in on July Retail Sales – Looks Great for Amazon, Alphabet, UPS and Costco

As mentioned in this week’s Monday Morning Kickoff, there is a modest amount of economic data to be had this week, including yesterday’s July Retail Sales Report. Overall it was a positive report with core retail sales, which exclude auto, gasoline station, building materials, and food services and drinking places sales, up 0.5 percent. Moreover, the June decline of 0.1 percent was revised to an uptick of 0.1 percent. Digging into the July report, we found a pick-up in digital commerce, which likely reflects the Back to School shopping season as well as ongoing efforts by Amazon (AMZN) and others to grab consumer wallet share. Let’s remember that Amazon’s own would-be shopping holiday – Prime Day – fell in early July and likely was partly responsible for the strong rebound in digital shopping during the month.

Year over year, Nonstore retailers (Commerce Dept. speak for digital commerce sales) rose 11.5 percent in July, once again making the category the strongest performer. We see this as boding well for not only our Amazon shares but also for United Parcel Service (UPS) — those packages have to get to your front door somehow — as well as Alphabet (GOOGL) given its Google Shopping service as well as the company’s Search business.

Getting back to the July Retail Sales Report, most other categories were positive for the month, save for Sporting Goods, Electronics & Appliances and Department Stores. The month’s data helps put some understanding around Dick’s Sporting Goods (DKS) slashing its 2017 outlook, but we also think that company is poised to hit the headwind aspect of our Connected Society investing theme following Nike’s (NKE) recent linkage with Amazon. Said another way, we continue to see a bleak outlook for traditional brick & mortar retailers as consumer products and apparel companies, especially branded ones, embrace Amazon and other digital logistic businesses.

Finally, the July Retail Sales Report put some much-needed context around Costco Wholesale’s (COST) July sales report. As a reminder, Costco reported its July sales increased 6.0 percent in the US, and 6.2 percent across the entire geographic footprint. That compares to just a 2 percent increase for General Merchandise stores as well as Grocery vs. July 2016. Additionally, Costco continued to open up new warehouse locations during the month, reaching 736 locations compared to 729 at the end of April. Paired with the recent membership fee increase, this expanding footprint should be a positive impact for the all-important and high margin member fee revenue stream.

• Our price target on Amazon (AMZN) shares remains $1,150.
• Our price target on Alphabet (GOOGL) shares remains $1,050.
• Our price target on United Parcel Service (UPS) shares remains $122.
• Our price target on Costco Wholesale (COST) remains $190.

 

On Deck – Earnings from Applied Materials

Even though we are in the dog days of summer, we still have a few companies left to report their quarterly results. One of them is Applied Materials (AMAT), and that event happens later this week. Following a bullish report from competitor Lam Research (LRCX), we expect solid results to be had. Despite the move lower over the last several weeks, the outlook for semiconductor capital equipment remains bright given the expanding reach of chips into a variety of end markets as well as demand for next-generation memory and display solutions.

This includes the same currently capacity-constrained organic light emitting diode display market, which is seeing rising demand dynamics from the smartphone, TV, wearables and automotive industries. And yes, this same demand function that is benefitting the shares of Universal Display (OLED) on the Tematica Select List. On Applied’s earnings call we’ll be listening for equipment order as well as overall demand tone for this disruptive display technology to determine as best we can how many quarters

One final demand driver that should result in a positive quarter for AMAT — ramping capacity in China. The potential wrinkle with this is we’ll need to be mindful of exchange rates and the impact on the company’s business, but all in all, we suspect the company will deliver a solid quarter with an upbeat outlook.

On a side note, odds are Applied will discuss factors that are driving chip demand and therefore incremental demand for its semiconductor capital equipment. Likely subjects include data centers, the Internet of Things, the Connected Car and other markets. The one we’ll be listening to given the Tematica Select List position in AXT Inc. (AXTI) and Dycom (DY) will be the smartphone market — which is entering its seasonally strong part of the year — and any commentary on 5G network deployments. Other 5G commentary points to a pick-up in testing by Verizon Communications (VZ) and AT&T (T) as well as Apple being granted a license to test 5G wireless services. Both of these developments reinforce our bullish view on both AXT and DY shares on the Tematica Select List.

• Our price target on Applied Materials (AMAT) remains $55.
• Our price target on AXT Inc. (AMAT) remains $11.
• Our price target on Dycom Industries (DY) remains $115.

 

Housekeeping Items

There are no housekeeping items this week, other than to remind you to check TematicaResearch.com as we post more thematic and macro commentary in the coming days. And while the Cocktail Investing podcast is on hiatus until the last week of August, feel free to revisit some of the past episodes here.

 

 

 

The Tematica Take on Disney’s Pending New Streaming Service

The Tematica Take on Disney’s Pending New Streaming Service

We expect Disney shares are likely to trade sideways over the next several weeks as the market continues to digest the recently announced moves by the House of Mouse. We, on the other hand, continue to see our Content is King investment theme providing significant tailwinds to the business, and as such we’re suspending our stop-loss and will instead look to use further share weakness to improve our cost position.

 

Our Content is King investment theme has been getting plenty of attention over the last week. It started with Disney (DIS) announcing it would look to sever its relationship with Netflix (NFLX) as it plans to launch its own streaming services for ESPN and Disney content in 2018 and 2019, respectively. During the company’s 2Q 2017 earnings call, in which it discussed its better than expected quarterly results, it also offered some insight into its plans around this planned streaming service:

  • The new Disney content service will become the exclusive home in the U.S. for subscription video-on-demand viewing of the newest live action and animated movies from Disney and Pixar, beginning with the 2019 slate, which includes Toy Story 4, the sequel to Frozen, and The Lion King from Disney live-action, along with other highly-anticipated movies.
  • Disney will be making a substantial investment in original movies, original television series, and short form content for this platform, produced by our studio, Disney Interactive, and Disney Channel teams.
  • Subscribers will also have access to a vast collection of films and television content from our library.

As part of this move, Disney increased its ownership position in BAMTech, but came up short when it came to specifics about the launch of the planned service. You’ll notice what was not discussed, which was Disney’s Marvel and Lucasfilm properties, both of which are staples at Netflix, including several Marvel TV properties like Daredevil, Jessica Jones, and others. We chalk this up to Disney still figuring it out as it goes, but we expect more details to emerge in the coming months.

We understand Disney’s move for greater control over the distribution of its content as consumers increasingly shun cable and satellite bundles in favor of embracing the cutting the cord aspect of our Connected Society investing theme to watch what they want, where they want and when they want. Obviously, this move by Disney adds a layer of investment and uncertainty into the mix as it raises many questions at a time when the company is shy on details. That said, we know Disney is extremely careful in making its moves and usually has a well thought out, cohesive plan that leverages without sacrificing its content.

As we and others digest this initiative, with no major catalyst pending until the company resumes its run at the box office later this year, we expect Disney shares are likely to trade sideways over the next several weeks. We do suspect Disney will opportunistically use its share buyback program to its advantage in the coming weeks, which should help support the shares in the coming weeks. On the June quarter earnings call, Disney shared it had repurchased 22.3 million shares for $2.4 billion during the April-June 2017 period. Over the last nine months (let’s remember Disney is one of those “funny fiscals” that ends its business year in September), the company has repurchased 64.3 million shares for approximately $6.8 billion and shared it intends to end the current fiscal year repurchasing $9-$10 billion. Some quick sandbox math tells us that means Disney could buy back $2.2 to $3.2 billion worth of stock in the current quarter. Given the fall off in the shares of late, we’re inclined to think such activity will skew toward the higher end of the range.

In keeping with our Content is King theme, we recognize the vast library of characters and content under the Disney hood. As the company returns to a more normalized presence at the box office beginning in the December quarter and continuing through 2018, we’ll be patient with the shares.

We’ll be pulling the lens back on several Content is King announcements, including Netflix buying comic-book company MillarWorld as well as inking an exclusive deal with the creator Disney/ABC’s Scandal Shonda Rhimes, and Facebook (FB) angling to attack both the TV advertising spending stream and Alphabet’s (GOOGL) YouTube at the same time. We’ll have our thematic thoughts on what these moves and others mean for our Content is King theme on TematicaResearch.com shortly.

  • Our price target on DIS shares remains $125.
  • We will suspend our $100 stop loss at this time, as we’re inclined to use any incremental weakness to improve our cost basis in the position.

 

Barron’s Gets Behind our OLED, AMAT and DIS Positions

Barron’s Gets Behind our OLED, AMAT and DIS Positions

Over the weekend, among its many articles Barron’s published two pertaining to several positions on the Tematica Select List — Disruptive Technology plays Universal Display (OLED), Applied Materials (AMAT) and Content is King company Disney (DIS). In our view, each of these articles is bullish for the corresponding shares, but even so let’s review:

In “Corning, Samsung: China’s OLED Spend May Be Big Trouble in 2018, Says Bernstein”  following conversation with 23 companies and industry experts, investment firm Bernstein share their view that, “China is a big force in a rise in spending for display technologies, particularly, OLED, which is taking over from LCD, and also for spending on semiconductors, with the move to so-called 3-D NAND chips.”  The authors of the report go on to say:

“OLED capacity ramp-ups from the Chinese players are even more aggressive than we thought, and hence equipment and material players are benefiting from this ‘OLED capex cycle’. On the semiconductor equipment side, we are seeing a similar story – rising capex for 3D NAND coming from China will translate into good demand for semi equipment makers. Finally, for memory, DRAM supply is tight for now, so read-through is positive for DRAM pricing through 2017.”

We certainly see this rather positive and confirming for our investment thesis on Universal Display and Applied Materials. While many have and will likely continue to focus on Apple (AAPL) and its next iPhone iteration, we see a larger shift going on, much like the one we saw more than a decade ago when light emitting diode (LED) technology exploded. As LED applications expanded from mobile phones and backlighting for LCD TVs to automotive lighting, Cree (CREE) shares took off, which was very positive for our readers at the time since we had a Buy rating on the shares at the time. This time around, we see the same happening for Universal Display shares, especially since we see Universal’s business benefitting from its intellectual property licensing business. In our view that makes the company more like Qualcomm (QCOM) than Cree.

Turning to the second article, “Disney’s Iger On Movies, Parks, ESPN” the author hits a number of points that power our investment thesis — an improving movie slate and recent park price increases that should drive revenue higher this year. The article also bangs a familiar drum that is ESPN, which continues to hemorrhage customers as more and more cut the cord, but it also mentions that Disney is expected to launch its own over the top ESPN service later this year as well as ESPN landing on other over the top services like our own AT&T’s (T) DirectTV NOW. As we recently shared, Disney is also focusing on cost control inside ESPN, including laying off TV, radio, and online personalities as part of a plan to “trim $100 million from the 2016 budget and $250 million in 2017.”

Getting back to Disney’s film business, its latest release, live-action “Beauty and the Beast” delivered a record-setting weekend box office opening with $170 million. Not only was this a record-setting March opening weekend, but the seventh largest domestic opening of all-time. Internationally, “Beauty and the Beast” delivered an estimated $180 million in ticket sales from 44 material markets for an estimated $350 million global opening, making it the #14 on the all-time best list. We can already see the Disney merchandise flying off the shelves now and later this year when the DVD and video on demand releases hit just in time for year-end holiday shopping. Much the way Disney is adding Frozen and Star Wars franchise attractions to its park, we would not be surprised to see a Beauty and the Beast addition as well.

  • We continue to rate Universal Display (OLED) shares a Buy with a $100 price target.
  • Our rating on Applied Materials (AMAT) remains a Buy with a $47 price target. 
  • We continue to rate Disney (DIS) shares a Buy with a $125 price target.
Putting Some Defensive Measures in Place Ahead of Tuesday’s Trump Speech

Putting Some Defensive Measures in Place Ahead of Tuesday’s Trump Speech

If you’ve missed our weekly Monday missive that is the Monday Morning Kickoff, we’d encourage you to pursue it later today as it offers both context and perspective on last week, including much talk about the Fed, and sets the stage for this week.

This week, we’ve got a lot of data coming at us, more corporate earnings that prominently feature our Cash-strapped Consumer and Fattening of the Population investing themes. There are a number of events and conferences as well, and before too long we’ll have some thoughts on this week’s Mobile World Congress, an event that meshes very well with our Connected Society, Disruptive Technology and Cashless Consumption investing themes.

We expect to see a number of announcements ranging from new smartphone models, connected as well as autonomous vehicle developments, voice digital assistant initiatives, drones, and payment systems to name a few. We’ll be watching these with regard to a number of positions on the Tematica Select List, including Universal Display (OLED), Nuance Communications (NUAN), AT&T (T), Dycom Industries (DY), CalAmp (CAMP) and Alphabet (GOOGL) as well as Amazon (AMZN). Already Amazon has announced it will bring its Alexa VDA to Motorola’s smartphones, and we see that as the tip of the proverbial iceberg his week.

As the Mobile World Congress gets underway, however, we have another event that should capture investor attention. After presenting today what’s called a “skinny budget”, (which we view as the “opening bid budget”) tomorrow night President Trump will be speaking to a joint session of Congress. Typically this is referred to as the State of the Union Address, but it’s not called that for a newly elected president. Trump has already shared that he will be talking about health care reform — “We’re going to be speaking very specifically about a very complicated subject…I think we have something that is really going to be excellent.”

As we’ve said before, we’re optimistic and hopeful, but thus far it seems Republicans have yet to find common ground on how to move forward on this. In addition to healthcare reform, investors, including us, will be listening for more details on Trump’s fiscal policies. The issue is speeches such as this tend to be lacking in specifics, and we would be rather surprised to see Trump deviate from that tradition. Moreover, we’ve already seen the Treasury Secretary push out the timetable for a tax report to late summer, and Trump himself suggested that we are not likely to see his tax reform proposal until after the healthcare reform has been addressed.

As we shared in this morning’s Monday Morning Kickoff, with the S&P 500 trading at 18x expected earnings, it looks like the stock market is out over its ski tips. Two drivers of the market rally over the coming months have been:

  • The improving, but not stellar economic data
  • The hope that President Trump’s policies will jumpstart the economy.

We’ve been saying for some time that the soonest we’d likely get any meaningful impact from Trump’s policies would be the back half of 2017. That’s been our perspective, but as we know from time to time, the stock market can get ahead of itself, and we see this as one of those times. The stock market’s move reflects expectations for an accelerating economy – it’s the only way to get the “E” that is earnings growing enough to make the market’s current valuation more palatable.

 

Need to Keep Our Eyes on Both Sides of the Equation

One of the common mistakes we see with investors is they almost always only focus on the upside to be had, without keeping an eye on the downside risks. If Trump is successful when it comes to the domestic economy, and we’d love nothing more than to see acceleration here, earnings will likely grow materially.

One of the potential risks we see this week is the market being disappointed by the lack of details that Trump will share tomorrow night, which might be read as a push out in timing relative to what the stock market expects. As we said on last week’s Cocktail Investing podcast, resetting expectations is a lot like children that open presents on Christmas morning to find something other than what they expected — it’s far from a harmonious event and more like one that is met with mental daggers, confusion, and second guessing. In short, not a fun time at all.

For that reason, we’re going to make some defensive adjustments to the Tematica Select List, which has enjoyed the market rally over the last few months and led to strong moves in our Universal Display (OLED), AMN Healthcare (AMN), Costco Wholesale (COST) shares as well as several others.

 

With an eye toward preserving profits, we are going to introduce the following stop losses:
  • Alphabet (GOOGL) at $800
  • Universal Display at $70
  • AMN Healthcare at $37
  • PowerShares NASDAQ Internet Portfolio ETF (PNQI) at $90

 

Alongside these new stop losses, we’re also going to raise several existing ones:
  • Boost our stop loss on AT&T (T) to $36 from $31
  • Raise our stop loss on International Flavors & Fragrances (IFF) to $115 from $105
  • Boost our stop loss on Costco Wholesale to $170 from $165
  • Increase our stop loss on Disney (DIS) shares to $100 from $87

 

Again, our thought is better to be safe than sorry given where the market currently sits. We’ll continue to review other positions on the Tematica Select List with similar actions where and when it makes sense.

 

If Social Media Giant Inks a Deal with MLB It Could be More Than a Connected Society Play

If Social Media Giant Inks a Deal with MLB It Could be More Than a Connected Society Play

Earlier today, Reuters is reporting that Connected Society company Facebook (FB) is in talks with Major League Baseball (MLB) to live stream at least one game per week during the upcoming season. We’ve seen Facebook live stream other sporting events, like basketball and soccer, but should the company ink a deal with MLB it would mean a steady stream of games over the season.

Given the nature of live sporting events, as well as the strong fan following, we see Facebook’s angle in offering this kind of program as threefold — looking to attract incremental users, drive additional minutes of use, and deliver more advertising to its user base, which should improve its monetization efforts. All three of those are very much in tune with Facebook’s existing revenue strategy and meshes rather well with its growing interest in attacking the TV advertising market.

From a high level such a deal pushing Facebook not only deeper into the increasingly Connected Society, but pulling it into our Content is King investing theme as well. Sporting events are one of the last holdouts in the move to streaming services, and its loyal fan base is likely to shift to video consumption alternatives that allow them to get events where they want, when they want and on the device they have at the time be it TV, smartphone, computer or tablet. With the recent deployment of its app for Apple’s (AAPL) Apple TV and others soon to follow, Facebook has all of these modalities covered.

To date, Netflix (NFLX) has shied away from streaming such events, and while there have been rumblings about Amazon (AMZN) entering the fray with its Prime video platform, Twitter (TWTR) has been one of the few to venture into this area live streaming Thursday night NFL games last season. Between Facebook and Twitter, we see MLB and others opting for Facebook given its larger and more global reach as well as far greater success at monetizing its user base.

Should a deal with MLB come through, we would see this not only as a positive development but one that likely paves the way for more streaming video content on Facebook’s platforms — sports or otherwise. As avid consumers of streaming content, we would welcome this with open arms; as investors, depending on the scope of such a rollout there could be upside to our $155 price target for the Facebook stock.

 

On the Major League Baseball / ESPN side of the Equation

Today’s news report about this potential Facebook / MLB deal doesn’t mention Major League Baseball’s other media and streaming activities, particularly ESPN.  This spring will make the beginning of the fifth year of a $5.6 billion agreement between MLB and ESPN that keeps the national pastime on that network through 2021. Of course, the struggles of Disney-owned ESPN have been well-documented recently as its cable subscriber numbers continue to decline as chord-cutting activity increases, as well as seeing consumers trade down to smaller cable packages that omit ESPN.

Major League Baseball, on the other hand, has been at the forefront of the streaming of its games and app-driven content through BAMTech, the digital media company spun off by Major League Baseball’s MLB Advanced Media. Just last year, The Walt Disney Co (DIS) stepped up to make a $1 billion investment in BAMTech, joining MLB and the National Hockey League as co-owners.

So while this Facebook/MLB story makes no mention of Disney and ESPN, it’s pretty clear from the tangled web of BAMTech ownership, that ESPN will either be somehow involved in the streaming of these live events on Facebook (possibly producing the broadcast and using ESPN announcers) or in the very least Disney will financially benefit from the deal given its ownership in BAMTech.

We’ll be watching to see if any such move develops.

  • We continue to rate FB shares a Buy with $155 price target.
  • We continue to rate AMZN shares a Buy and our price target remains $975
  • We continue to rate DIS shares a Buy with a $125 price target.

 

 

Time Warner Shareholders Say “Yes” to AT&T

Time Warner Shareholders Say “Yes” to AT&T

As we noted yesterday, Time Warner (TWX) shareholders met yesterday to decide on the $86 billion merger with AT&T (T). As expected Time Warner shareholder approved the proposed merger and coming out of that meeting, Time Warner anticipates the transaction closing before the end of 2017.

Time Warner’s CEO Jeff Bewkes said in a statement that “78% of our outstanding shares” voted in favor of the merger, “and of the shares voted, 99% were cast in favor of the proposal.”

Pretty much a non-event, but one that removes one more hurdle in the proposed merger. We remain fans of the combination as it moves Connected Society AT&T into the Content is King tailwind, and we’ve seen how that investment theme has benefited Tematica Select List’s Disney (DIS) as well as Comcast (CMCSA) following its acquisition of NBC Universal.

  • With merger and synergy details from the proposed merged companies still pending, we continue to rate T shares a Hold, with a $45 price target. All things being equal, we’d look to revisit our rating on the shares below $40.
Look out DirecTV Now, here comes Hulu’s live TV streaming service complete with ESPN

Look out DirecTV Now, here comes Hulu’s live TV streaming service complete with ESPN

The race to replace broadcast TV with streaming services has become even more competitive with Hulu tossing it’s hat in the ring alongside the soon to be launched DirecTV Now from AT&T that is likely to benefit from the announced Time Warner acquisition. To drive viewers, it’s all about the content and increasingly proprietary content like we’re increasingly finding at Netflix and Amazon. While the Disney relationship brings ESPN into its fold, it sounds to us like Hulu needs to get that balance sheet going.

Hulu said today it has partnered with Disney and 21st Century Fox for its upcoming live TV streaming service, launching next year. The deals involve Fox’s news, entertainment, sports, and other properties, along with Disney’s portfolio of networks from is ABC Television Group and ESPN, among other things. In total, the two agreements will bring more than 35 TV networks to Hulu’s live TV service.What this means for consumers who are considering cutting the cord with pay TV is that they’ll gain access to two of the top broadcast networks, Fox and ABC, on Hulu’s new streaming platform.In terms of sports, the two deals will include Fox Sports networks (Fox Sports 1 and 2), BTN, ESPN networks, including ESPN1, ESPN2, ESPN3, ESPNU, ESPN-SEC, and Fox’s regional sports networks in dozens of markets. Meanwhile, other popular cable TV channels will also be included, like Disney Channel, Disney XD, Disney Junior, Fox News, Fox Business, Freeform, FX, FXX, FXM, National Geographic and Nat Geo Wild.

Source: Hulu’s live TV streaming service will have channels from Fox & Disney, including ABC, ESPN & more | TechCrunch

Video Arcades Trump Most Amusement Parks, Not Disney or Universal

Video Arcades Trump Most Amusement Parks, Not Disney or Universal

What do you get when you mash together aspects of our Connected Society  and Content is King investing themes? One answer is gaming.

Add in our “Death of the Mall as You Know It” view and we are not surprised by the return of video arcades. These 21st-century arcades are filled with high-end 3D games and simulators that are chomping more than just a few quarters. But that’s where our Cashless Consumption theme comes into play as a player uses a topped off game play card that also keeps track of  prize tickets. While we still love our roller coasters, we can understand how the quasi-addictive nature of gaming. Add in some friends and some adult beverages a la our Guilty Pleasure investing theme and <boom> there is your Dave & Buster’s Entertainment (PLAY) business model.

For those of you who miss the old stand-up games of Galaga and Defender, there were more “amusement arcades” in 2014 than in 1998, according to the Census Bureau.

The amusement park has been on a roller coaster ride for two decades, one that—as the chart shows—is fundamentally headed downward. In some years, more parks opened than shut, but the small upticks have been wiped out by the near-regularity of a free fall. There were 48 percent fewer amusement parks in the U.S. in 2014 than in 1998.

Among these, the smaller parks which depend on local or regional customers, and often just during summer, are having the hardest time. Even such a well-loved brand as Lego met industry skepticism as it seeks to build a chain of regional parks. On the other hand, huge amusement and theme parks that double as vacation destinations are still going strong.

Source: Americans Are in Love With Video Arcades Again – Bloomberg